Costly Electricity May Still Be Cheap

The deep power crisis that Bangladesh is currently living through is affecting more people than the 40 percent population who currently have access to electricity. The reasons are simple.

For industries power outages increase production costs and the operating uncertainty that enterprises face. Losses arise from spoilage of goods-in-process and damage to machinery. Often the cuts in power supply cause production losses lasting beyond the duration of the outage. E-commerce and ICT cannot operate without reliable supplies of electricity. Mechanization of businesses is rendered ineffective, affecting productivity. SMEs rely on electricity for a variety of needs—lighting, refrigeration, grain mills, water pumping, food preservation and you name it. More generally, economic growth that creates jobs and enhances incomes requires electricity. Less and unreliable electricity translates into less and unreliable jobs. This is now a well established fact.

The million dollar question is what do we do to energize the economy?

The government has opted for quick rental stations using liquid fuels and capable of producing electricity within 6-12 months as a short-term response until longer term remedies are built. The desirability of this option has been questioned. The wholesale purchase price reportedly range between Tk 8 to Tk 14 per kWh, compared with slightly over Tk 3 per kWh cost of producing power from the conventional plants that take 4-5 years to build.

Keep in mind that there is hardly any alternative to rental power if we want to begin to alleviate the power deficit in the immediate future. The question essentially boils down to the opportunity cost per kWh of electricity not supplied. If this exceeds the purchase price of rental power then the latter is still worth it, even though more expensive than the medium to longer term option of producing power using conventional plants.

How much is this opportunity cost? Unfortunately, there are no studies investigating this question in Bangladesh. To get some sense of the magnitudes involved, our only option is to look at international experience. The problem here is that most of these studies pertain to either industrialized countries or countries that are approaching high level of industrialization. Often, the lack of relevant data makes such studies impossible in poor countries where the incidence of electricity outages is most acute.

Fortunately, there is one study by Roop Jyoti, Aygul Ozbaffi and Glen Jenkins in 2006 which was made possible due to the availability of a rich source of industrial information on power outages that affected the production at a spinning mill, a steel re-rolling mill, and an oxygen factory in Nepal. This data which covers a period of 5 years in the 1990s is accompanied by sets of detailed cost and operating data for each of these enterprises for the same five years that the power outage data is available. The authors were able to measure the direct impact of electricity outages on the level of profits of the enterprises through the effect such outages have on the contribution to profits that is foregone by the loss in production and increased costs.

This study finds that the loss per kWh not supplied ranges from $0.11/kWh to $0.33 kWh with an average of $0.23/kWh for Jyoti Spinning Mills; from US$ 0.13 to US$ 0.32, with an average of US$ 0.24/kWh for Oxygen; and from US$ 0.47 to 1.28/kWh with a average cost of US$ 0.98/kWh for Himal Iron and Steel. The authors also calculate the opportunity cost of power failures (unplanned outages) and load shedding (planned outages) and find that for these three enterprises the values are very similar.

The upshot is no matter how we look at it the opportunity costs are high. The lowest number on opportunity costs we find above is $0.11, which is equivalent to Bangladesh taka (BDT) 7.6 per kWh, and the highest number is $1.28 which is equivalent to BDT 88.3 per kWh.

How relevant are these to Bangladesh?

One way to judge is to figure whether, in the current state of the Bangladesh economy vis-à-vis Nepal, the opportunity costs of not meeting the electricity shortage are likely to be higher or lower than the ones reported above for Nepal. Bangladesh’s per capita income is higher than Nepal as is the size of the economy which is nearly seven times bigger. The share of industry in GDP is 1.7 times higher and the share of agriculture is nearly half lower while agriculture in Bangladesh is more mechanized and the service sector more energy intensive. All these suggest that the opportunity cost of not having electricity is likely to be higher in Bangladesh relative to Nepal.

There are some ball park estimates. Professor Ijaz Hossain of the Bangladesh University of Engineering and Technology has made a simple back of the envelope calculation by dividing the total energy shortage by the energy intensity per dollar of GDP. This yields a GDP loss of $13.3 billion in FY10, which translates into Tk 70 loss per kWh of electricity not produced. A study by the Bangladesh Institute of Development Studies reports that the elasticity of GDP with respect to electricity is 0.55. If we assume the shortage is about 25 percent of demand on average, this also gives a GDP loss of around $13 to 14 billion annually and a loss of Tk 71.6 per kWh not produced. These may appear to be on the high side considering the Tk 32 loss per unit of electricity shortage estimate that some trade bodies recently came up with. Yet, relative to the cost of obtaining power from quick rentals, the conclusion that the opportunity cost of not having power is very high is inescapable.

Bottom line: Whether a commodity or service is costly or cheap depends on the available alternatives. Rental power is costly relative to what can be made available in the medium to long term from large power plants; but it is cheap relative to what the economy loses by not having power now and in the immediate future.

Comments

Electricity from conventional power plants proves very costly with non-reliability of its availability and voltage fluctuations, which the government-owned supply agencies never bother to remedy. In India, the supply voltage fluctuates in between 50 to 300 vols instead of a normal of 230 volts. The availability, officially truncated to 8 hours a day on an average is hardly available for 4 hours a day only with many unscheduld outages in between.

Power sector crisis is being faced by not only Bangladesh but, I believe, by many other countries, particularly in South Asia and Africa. Thanks for your blog posting focusing on the ultimate impact of power shortages. As a result of urbanization and industrialization, the number of new motors, pumps and compressors in factories, and appliances and other modern gadgets in homes and new buildings, that all need electricity to keep running, have been growing at exponential rates, often outpacing economic growth rates, but at the same time, the availability and reliability of power supply keeps dwindling. As power engineering students we had learnt about “reserve margins” and how it should be ideally kept around 15-20% (based on developed country norms), but we never saw that happening in reality when we became practitioners… and, I believe, the saga continues… not much has changed in many of these countries ..for the last 20-30 years. In these countries, the energy – GDP elasticity remains high (while much of the OECD world has been successful in decoupling the two to a large extent) and the power system supply-demand gaps are mind-boggling...
Your conclusions about the opportunity costs of unserved, underserved or poorly-served electricity in Bangladesh, even though extrapolated from the Nepal study, is right on the dot. In electricity outage cost research that I had done in 1990s, we had found similar estimates for India too, using willingness-to-pay and adaptive response approaches. Almost all industries had “adapted” to poor system reliability and set up back-up generation (mainly diesel and kerosene run gensets) and, using the latter as proxy, we had estimated that the customer outage costs in the Northern Region was higher than the average tariffs (of grid-based supply) at that time. For some of the batch-process industries, which could not withstand brownouts like even small voltage fluctuations , the WTP-based estimates were several-fold higher, of course. http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6V2S-3VTSRGN-5&_user=1916569&_coverDate=09%2F30%2F1996&_rdoc=1&_fmt=high&_orig=search&_sort=d&_docanchor=&view=c&_searchStrId=1441651185&_rerunOrigin=google&_acct=C000055300&_version=1&_urlVersion=0&_userid=1916569&md5=33cee54e4c0fb29f819fa82267c4ebde
On the solution part though, I would like to humbly differ a bit from “hardly any alternative to rental power if we want to begin to alleviate the power deficit in the immediate future.” In addition to rental power, I think there are some other options, that Bangladesh power sector could consider (that OECD countries pursued since the late 1970s, and now also countries like India, China, Mexico, Philippines, South Africa, etc. have started putting massive efforts on). I am talking about pursuing both renewable energy options for the long run, but as short term solutions, reducing the apparent wastage of energy by seriously implementing energy efficiency improvements on a larger scale – all along the generation, transmission and distribution, and end-use chain. One of the small interventions that had been initiated last year with support from the Bank’s RERED Additional Financing project, called ELIB, targets end-use lighting efficiency improvements amongst the residential consumers in Bangladesh.. https://blogs.worldbank.org/endpovertyinsouthasia/bangladesh-sets-world-record-%E2%80%93-5-million-cfls-day-one-bulb-time but this is a drop in the bucket as far as untapped opportunities are concerned. A wide spectrum of many cost-effective measures to save energy exist across all other sectors (which are viable even when you consider Tk 3 per kWh cost of supply) -- ranging from the thousands of garment factories to the big public sector-owned, old fertilizer industries. And, most of these measures are quick to implement, if done right.
In fact, in a first-cut analysis led by Prof Ijaz Hosain (of BUET) himself, that the Bank (along with GTZ support) had commissioned last year, we had assessed huge energy savings potential based on some selected illustrative project profiles across various sectors. For instance, retro-fitting and rehabilitating the six urea-ammonia fertilizer plants can potentially save up to 25 BCF of gas annually, or installing efficient electronic ballasts (in place of magnetic ballasts) in fluorescent tubelights in some 5000 garment and knitting factories is estimated to save 150 GWh/year.
Generally being small and dispersed, implementation of energy efficiency measures is also a complex matter, especially when it comes to the demand side options (like the ones in factories, buildings and households). In addition to technologies, policies, programs and finance --- which sometime seem to be the relatively easier part to deal with, it takes a significant amount of effort and time to change the policymakers’ mindset and institutional governance systems which, for obvious reasons, are traditionally very supply-centric and oriented towards adding more and more generation capacities….

Thanks Ashok for taking the time to write such thoughtful comments. I take your point that increasing the efficiency of energy use has to be part of the solution. That in turn would require getting energy prices right, among others. I am not sure how practical it is to expect quick implementation of the other energy saving measures that you suggest. Technical solutions sound very good in theory. Question is are they doable in practice, given the political economy of the sectors that you mention. Even price adjustments will be hard to do under the present circumstances. I also think that Bangladesh needs to expand generation to support longer term growth. Energy savings can only take us so far, but not too far. Thanks again.

I'm sure outages and under-utilization is quite common in many energy markets. Some of this may be due to energy regulation unfortunately. My client however, Reliable Power offers business electricity and residential electricity efficiently and reliably.